French Revolution and 2014 India

In one of my previous blog I have explained how economics affect the outcome of elections. but here I am going to digress a bit and see what exactly causes revolutions and what is that makes people raise up against status quo and demand change

French Revolution, when my high school History teacher asked us why the revolution occurred in France? We all replied back with usual bookish reasons like Feudalism, Societal inequality, Monarchical despotism, etc. But he replied back by asking why did it happen in France and not elsewhere in Europe. In 18th Century Europe, Eastern and Southern Europe were far more feudal than France, the plight of the commoner in Russia, Poland or in central European states was far worse than that of France. Then why did the revolution occur in France?

Now one might wonder what the French Revolution has got to do with the present situation in India. Why am I even bothered about some ancient piece of history that occurred in a place thousands of miles from India. But I'll take that up later, for now let us closely examine on why French revolution occurred, what were the major causes that were responsible for the downfall of Louis XVI regime.

France in 1785 was one of the richest and most powerful nations of Europe. France under the reign of Louis XIV had reached the pinnacle of its power in Europe, only later to be over shadowed by Napoleon's conquest. France was the dominant power in Europe. Economically also France in 1787, was one of the most economically capable nations of Europe. Here is what Wikipedia says about the economy of France on the eve of the revolution.

"The French population exceeded 28 million; of Europe's 178 to 188 millions, only Imperial Russia had a greater population. France was also among the most urbanized countries of Europe, the population of Paris was second only to that of London (approximately 500,000 v. 800,000), and six of Europe's thirty-five largest cities were French. Other measures confirm France's inherent strength. France had 5.3 million of Europe's approximately thirty million male peasants. Its area under cultivation, productivity per unit area, level of industrialization, and gross national product  (about 14% of the continental European product, excluding Russia, and 6–10 percent above the level elsewhere in Europe ) all placed France near the very top of the scale. In short, while it may have lagged slightly behind the Low Countries, and possibly Switzerland, in per capita wealth, the sheer size of the French economy made it the premier economic power of continental Europe."

 

Surprising isn't it, if the average Frenchmen was better off then majority of his European peers. What really made him raise up and revolt? To answer the question, we need to look at the real underlying cause for the revolution to occur in France. And it was that the rising aspirations of the emerging middle class consisting of tradesmen, merchants, artisans and prosperous farmers was being throttled and restricted by the rigid aristocratic regime that was ruling France. As the noted French historian Alexis de Tocqueville noted, people revolt not when the situation has become desperate but when things starts to look better. France on the eve of the revolution had seen tremendous improvement in the standard of living of Frenchmen, and resulted in increased economic mobility, but the regime was not ready to accept this and bring about the changes to emancipate social and political mobility. Rising urbanization and the new emerging middle class had created an aspirational class who were not ready to wait and suffer due to ineptitude of the ruling aristocracy. So when the debt crisis erupted in 1786, people were not ready to listen to the reforms and solutions that were being offered by the regime. They wanted a far more revolutionary change to be brought in line with their growing aspirations. When the French nobility failed to do so, the country erupted.

This might surprise some people who might hold the misconception that revolutions occur when a country is depraved and its citizen’s rise up when they no longer take the hardships. In fact this is generally not the case, rarely has any such repressive country witnessed an uprising. Russia just before World War 1 had seen a rise in Industrialization and growing economy. Russia witnessed similar urbanization with growing numbers of peasant villagers who migrated to and from industrial and urban environments, but also by the introduction of city culture into the village through material goods, the press, and word of mouth. Then again this created an aspirational class among the new inhabitants of the city, mainly industrial workers and also the slightly better off peasants. Their growing ambitions were not met fast enough by the ruling aristocratic regime. Then finally the disastrous WW1 campaign brought out the ineptitude of the Romanov regime, finally resulting in the Russian revolution and the creation of the Soviet Union.

 

But a even suitable example could be Tiananmen Square uprising in China. In the late 1970s, the Chinese leadership of Deng Xiaoping abandoned Maoist-style planned collectivist economics, and embraced market-oriented reforms.  The reforms started in 1970s had given the chinese a small taste of economic and social freedom. This had finally unleashed the hidden aspirations of the Chinese trampled for decades by Mao's brutal regime. But the pace of the reform was not fast enough to satisfy the ballooning ambitions of the growing chinese middle class. Due to the rapid pace of change, by the late 1980s, grievances over inflation, limited career prospects for students, and corruption of the party elite were growing rapidly.The prevalent corruption and lack of opportunity to the youth created widespread dissatisfaction among them which finally sparked into an uprising, which sadly was crushed by the regime.

We can see similar incidences throughout history, fall of Berlin wall and communism in Eastern Europe again can be correlated with stagnation of the Warsaw pact countries and people's dissatisfaction with the pace of the reforms that were being introduced by Gorbachev. 

There seems to exist a precedent in history, that when the people of a nation have witnessed improvement in their standard of living possibly after a long time of stagnation and deprivation, raises aspirations tremendously for upward social, economic and politically mobility. And when this improvement slows down or stops due to external or intrinsic factors. The unmet aspirations make the people impatient for the desired change to occur. If the existent establishment is not able to carry out the required reforms at a pace to satisfy the need for change by the people. Then generally, people raise up, either in a non-violent peaceful manner or in a violent brutish revolution.

Now coming to point about the relevance of the above historical precedent to India. India post independence was subject to a gruelingly slow rate of growth of around 3-4% called "Hindu rate of growth". The liberalization of 1991 removed some of the shackles on the economy and created a post liberalization boom in the economic development of the country. This created a growing middle class whose aspirations have ballooned in the past two decades. There is whole generation of Indians who have not witnessed the sense of helplessness that was faced by their parents. The part of population born post liberalization has come to believe that high economic growth is their legitimate right. 

But the present UPA regime with its dithering, corrupt governance and economic mismanagement has managed to stifle the economy. The subsidy regime utilized to dole out to bribe voters is the very anti-thesis of the reforms required for double digit economic growth. With the aspirations set high, people are impatient today for change.

The climate is very similar today in India, to what it was in 18th century France. If the ruling government cannot bring about the required change, revolution is bound to occur. The Anna Hazare movement is one of the manifestations of such a revolution. The revolution need not be of the violent kind; in fact revolution can be purely political in nature.

Hence it is my belief that Narendra Modi currently has the greatest chance to become the next PM of India contrary to popular perceptions. Because what people crave for is for the reformation of the system to remove the obstacles that are preventing their aspirations from being met. This would certainly entail the removal of the current "Establishment" from the governing heights of the system and would look for someone outside the "Establishment" to bring about the desired change. Narendra Modi perfectly fits the profile for such a person, Modi is outside the current corrupt political/business/media establishment in Delhi and Modi has a proven record of delivering the changes aspired by the people. Hence 2014 possibly presents the Best chance for Modi to become PM. if he doesn't exploit this opportunity, it would be tough for him to get such an opportunity again.

Because if people's desire for change can overcome oppressive and dictatorial regimes, then surely it can overcome such " imagined" barriers to elect the man who can bring about the change that is being so desired by them.

Note: I would like to add some caveats,
1. No one can predict the future and as Nassim Nicholas Taleb elaborates in Black swan, to base the future on the past is a futile exercise
2. Narendra Modi need not be the only person, anyone who can promise or make the masses believe that he/she can bring about the changes that the people desire, can certainly succeed in this endeavor
3. Finally even if the situation demands so, no one can ever know when the spark for the fire will be lighted or whether it will be lighted at all

Inflation & its Causes - Is the central government simply printing money to fund its brainless schemes?

In my previous blog, I have detailed out how the common man undergoes tremendous suffering due to persistently high inflation. Now I will try to present a case on why Inflation has been relatively high in the UPA regime.

We can clearly see that Inflation has been stubbornly high in UPA regime. The inflation during the last decade has been obtained from World bank database as I did in my previous blog.

Source: World bank

Inflation is primarily caused by two kinds of shocks, supply side shocks and demand side shocks. In simple economic terms, Price is determined by the balance between supply and demand for a product. Hence prices rise when a) Demand for a product increases (eg: Roses on Valentine's Day) or b) Supply for the product drastically reduces (eg: Food grains during a drought)

Now let us analyse, What is the primary cause for Inflation for the past 7/8 years in India. Is it due to supply side effects or demand side effects?

Lets look at the supply side first. If supply side was truly the cause for the prolonged period of high inflation. Then a drastic fall in production and supply of a basket of important products would have been the main cause for such an event. But was there any event in the last 7/8 years that would suggest such as shock?? No, though rising oil prices could be classified to fall in the category of a supply side shock to the Indian economy, it could at the most explain 20/30% of the rise in inflation rates. At the same time food inflation has been in double digits for most of the time period, but there are no supply side events to explain the same. Barring the drought in 2008, India has recorded bumper crops year on year. In fact food grain production has increased by annual rate of 3.8% or cumulatively by 25% in the period between 2005 and 2011. This comes as a surprise, if the food grain production has increased and that too with bumper crops, grains were stored in the open ground due to lack of storage space, why has the food inflation been stubbornly high. Clearly supply side economics cannot explain the causes for high inflation.

Hence we can clearly state that inflation has to be driven by demand side economics. But first let me explain on how macro-economic fundamentals are actually responsible for inflation. The main culprit for inflation is persistently high current account deficits run by the central government.

Source: World bank

We can clearly see that inflation seems to be inversely correlated with current account surplus, the more the deficit in an year, higher has been inflation in that year. In the year between 2001 to 2004, central government maintained a current account surplus and the inflation in the same period was well below 5%, Compare that, to the period between 2005 to 2010, deficits have progressively increased from -1.2% in 2005 to -3.1% in 2010, inflation has correspondingly increased from 6.1% to 8.9% in 2010. Clearly there seems to be a relation between current account deficits and inflation.

Now let me explain how, current account deficit creates inflation. I will explain the concept in simpler terms without using economic jargon's and technicalities. Current account deficit is the difference between what the government spends and what it earns. A current account deficit implies that government is spending more than what it earns and a surplus means that the government spending is well within what it earns.

If the government is spending more than what it earns, how does it bridge the gap. The government like any profligate individual, borrows money to cover the gap. In case of central government, it borrows from the public through a variety of mechanisms but primarily by issuing government bonds and selling it to PSU banks and other investors. But there is also one important buyer for government bonds and that is RBI. RBI is the lender of the last resort and also regularly buys and supports government bonds. If you are wondering how RBI  buys vast amounts of government bonds, well the answer is simple, it prints the money needed to buy the bond. Hence RBI finances the government by simple mechanism of printing more money. Though the actual mechanism of how government goes on about doing this is not quite simple. In fact, RBI need not print any extra money, but can achieve this by changing certain monetary policy mechanisms.

The government has utilized this extra money mainly for increasing the subsidy doled out to its electoral vote banks. Subsidy as share of total expense increased from 45% in 2004 to 60% in 2010. In naive sense, government has resorted to giving free money to people. The implication of this is very straight forward, as the money that people have increases, the demand for goods and services increases. Hence the rising dole outs increased the money supply to the common man, thus increasing the demand for all kinds of products and goods. Hence this clearly corroborates, how the present high inflation is purely demand side phenomenon driven by excessive spending by the central government.

If we need further proof for the same, foreign exchange market is clear indicator for the value of a currency. If the government increases the money supply, the value of the currency vis a vis other currency depreciates. The value of US dollar stood at INR 45 in 2004, while the value of US dollar stands at INR 52-53 today. The depreciation in the value of rupee w.r.t US dollar is a clear indicator of increased money supply.

Hence UPA government's excessive splurging in order to further it's own selfish interest of getting the "Prince" elected as PM and in pursuing pseudo socialistic policies has brazenly increased the money supply. By doling out money to garner votes, it has created a perception of creating wealth, while in reality UPA's macro-economic mismanagement has destroyed the wealth of majority of the people and only a few cronies have enriched themselves in last 8 years, all in the name of serving Aam Aadmi.